# 26 U.S.C. § 385: Treatment of certain interests in corporations as stock or indebtedness Source: OLRC release point 119-134 . Cite pinpoints as 26 U.S.C. § 385(a)(1). ## § 385(a) Authority to prescribe regulations The Secretary is authorized to prescribe such regulations as may be necessary or appropriate to determine whether an interest in a corporation is to be treated for purposes of this title as stock or indebtedness (or as in part stock and in part indebtedness). ## § 385(b) Factors The regulations prescribed under this section shall set forth factors which are to be taken into account in determining with respect to a particular factual situation whether a debtor-creditor relationship exists or a corporation-shareholder relationship exists. The factors so set forth in the regulations may include among other factors: **§ 385(b)(1)** whether there is a written unconditional promise to pay on demand or on a specified date a sum certain in money in return for an adequate consideration in money or money’s worth, and to pay a fixed rate of interest, **§ 385(b)(2)** whether there is subordination to or preference over any indebtedness of the corporation, **§ 385(b)(3)** the ratio of debt to equity of the corporation, **§ 385(b)(4)** whether there is convertibility into the stock of the corporation, and **§ 385(b)(5)** the relationship between holdings of stock in the corporation and holdings of the interest in question. ## § 385(c) Effect of classification by issuer **§ 385(c)(1) In general.** The characterization (as of the time of issuance) by the issuer as to whether an interest in a corporation is stock or indebtedness shall be binding on such issuer and on all holders of such interest (but shall not be binding on the Secretary). **§ 385(c)(2) Notification of inconsistent treatment.** Except as provided in regulations, paragraph (1) shall not apply to any holder of an interest if such holder on his return discloses that he is treating such interest in a manner inconsistent with the characterization referred to in paragraph (1). **§ 385(c)(3) Regulations.** The Secretary is authorized to require such information as the Secretary determines to be necessary to carry out the provisions of this subsection. ## Regulations - [Treas. Reg. § 1.385-1](/26/reg/1.385-1.md): General provisions. (interprets § 385) - [Treas. Reg. § 1.385-3](/26/reg/1.385-3.md): Certain distributions of debt instruments and similar transactions. (interprets § 385) - [Treas. Reg. § 1.385-4](/26/reg/1.385-4.md): Treatment of consolidated groups. (interprets § 385) ## Final rules - [85 FR 28867](https://www.federalregister.gov/documents/2020/05/14/2020-08096/the-treatment-of-certain-interests-in-corporations-as-stock-or-indebtedness) (2020): The Treatment of Certain Interests in Corporations as Stock or Indebtedness - [84 FR 59297](https://www.federalregister.gov/documents/2019/11/04/2019-23817/removal-of-section-385-documentation-regulations) (2019): Removal of Section 385 Documentation Regulations - [81 FR 72858](https://www.federalregister.gov/documents/2016/10/21/2016-25105/treatment-of-certain-interests-in-corporations-as-stock-or-indebtedness) (2016): Treatment of Certain Interests in Corporations as Stock or Indebtedness ## Leading cases - [Selfe v. United States, 778 F.2d 769 (11th Cir. 1985)](https://www.courtlistener.com/opinion/461458/edward-m-selfe-and-jane-b-selfe-v-united-states/) - [Bauer v. Commissioner, 748 F.2d 1365 (9th Cir. 1985)](https://www.courtlistener.com/opinion/444645/philip-e-and-joan-bauer-federal-meat-co-and-phillip-and-ruth-himmelfarb/) ## Proposed regulations (not in force) - [Prop. Treas. Reg. § 1.385-4](/26/prop/1.385-4_2016-07425.md): Treatment of consolidated groups. (REG-108060-15, proposed 2016-04-08) ## Amendments - 1969-12-30: [Pub. L. 91-172](/26/act/91-172.md), 83 Stat. 613 - 1976-10-04: [Pub. L. 94-455](/26/act/94-455.md), 90 Stat. 1834 - 1989-12-19: [Pub. L. 101-239](/26/act/101-239.md), 103 Stat. 2337 - 1992-10-24: [Pub. L. 102-486](/26/act/102-486.md), 106 Stat. 3032